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Do Trump’s Tweets Point To Another Oil Crisis?

Jul05,2018

President Trump spent part of his July 4 holiday shouting at OPEC on twitter, demanding lower gasoline prices.

The tweets are coming more frequently these days, an indication of the political peril that Trump feels because of rising gasoline prices. The logic is odd though. Trump wants lower oil prices while at the same time his administration is trying to zero out 2.5 million barrels per day of Iranian oil exports.

“It does not occur to the U.S. president that it is Trump himself who is driving prices up through his Iran policy,” Commerzbank wrote in a note. If the U.S. succeeds in blocking Iran from exporting its oil, OPEC would struggle to offset the missing barrels. “Perhaps one of the U.S. president’s advisors should explain this to him,” Commerzbank added.

Trump’s advisers are clearly failing at their task, but Iranian officials tried to lend a helping hand by explaining the situation. “You impose sanctions on major producers, founders of OPEC, and yet you are asking them to reduce the prices?! Since when did you start ordering OPEC!” Iran’s OPEC governor Hossein Kazempour Ardebili said in a statement. “Your tweets have driven the prices up by at least $10/b. Pls stop it, otherwise it will go even higher!”

Meanwhile, the U.S. Congress has revived legislation that would remove the immunity that sovereign nations have from being sued from antitrust violations. The so-called “NOPEC Act” would make OPEC subject to antitrust law, allowing the U.S. to go after OPEC for manipulating the oil market. The legislation has floated around Washington for years, typically going nowhere because past presidents have consistently opposed the measure.

The legislation still probably won’t go anywhere, but OPEC could be forgiven for being confused by the mixed signals coming from Washington, which can essentially be boiled down to: “Stop your anti-competitive behavior” but “intervene in the markets to manipulate prices to our benefit,” and “nobody is allowed to buy oil from Iran” and “why are oil prices so high?! Do something about it!”

Leaving aside the inherently contradictory objectives from Washington, it isn’t clear that OPEC could stop the oil price rally even if it wanted to. The group is starting to lose control of the oil market now that the supply outages are piling up.

President Trump wants Saudi Arabia to add 2 million barrels per day (mb/d) of fresh supply, but the Kingdom would struggle to ramp up by that much. Saudi Arabia’s all-time record high output level stands at about 10.7 mb/d. Using its entire spare capacity would mean producing at around 12.5 mb/d, but most analysts believe that would take more than a year to achieve, and some analysts question whether it’s even possible at all.

Producing at that level would require more drilling and expanding existing fields – it isn’t as simple as just opening the taps.

Moreover, in the past few years, OPEC’s spare capacity has dwindled both in absolute terms and as a share of the oil market, reducing its influence. Excluding new members Gabon and Equatorial Guinea, OPEC’s effective spare capacity has declined by 800,000 bpd over the past five years even as global demand has climbed by 10 mb/d, according to Energy Intelligence.

That leaves very little firepower to call upon. The potential outage in Iran alone could swamp the group’s spare capacity. The U.S. is hoping to take 2.5 mb/d of Iranian exports offline, which is about as much as the theoretical spare capacity that Saudi Arabia has left. “The spare capacities in OPEC countries are just sufficient to offset this amount, but will not be enough if supply is additionally reduced by outages elsewhere – such as in Libya and Canada at present – and by falling oil production in Venezuela. Prices will rise as a result,” Commerzbank concluded.